Principled. Conservative. Cautious. These are the words that colleagues, from technical assistance specialists and SEC staff to stock market specialists and foreign investment advisors, used to describe Oleksiy Romashko. To these descriptives can be added “apolitical, punctilious, dogged.” At 09:00 on Oct. 29, 2001, builders found his body in the hallway of his apartment building on vul. Artema 10. Romashko appeared to have been stabbed to death on his way to work and shot in the face for good measure. “That’s the first sign of a professional killing,” notes one Ukrainian journalist who covers the political beat. “They used to teach soviet special services guys to always aim for the head, never the chest.” The 38-year-old family man was one of the original members of the State Securities and Stock Market Commission, Ukraine’s SEC.

The violent death of Valeriy Malev, the 61-year-old head of UkrSpetsExport, on Mar. 6, 2002, raised once more questions about the stalled investigation into Romashko’s murder. There is little doubt in the minds of those who have thought about his death, that it was a contracted murder. Part 1 of this three-part article reviews reactions to this event in an attempt to understand how a man like Oleksiy Romashko wound up dead. Part 2 considers what was happening to Ukraine’s SEC in 2000-2001, in particular the struggle over control of the National Depository System. Part 3 shows how internal conflicts gradually paralyzed the SEC and what Romashko’s murder means. This article was originally published in late March and April 2002 in Eastern Economist #426, #427 and #429.

Part 1

A few good men

One of seven members of the State Securities and Stock Market Commission or SEC, Oleksiy Romashko was the commissioner who handled control and audit. Although the market was very weak, almost non-existent, when the SEC was originally formed in 1995, down the line it was expected to become a powerful body that needed to be both independent and impartial – and free of any outside threat or pressure.

As the Commission’s first head, Oleh Mozgoviy had been given carte blanche in 1995 to pick his fellow commissioners. He invited Romashko, whom he knew because Romashko had defended his dissertation on the national economy before Mozgoviy. Then just 32, Romashko was deputy head of a department under the Dnipropetrovsk MiskVykonKom or City Council and had also run a small business.

In addition to Romashko, Mozgoviy chose Mykola Volkov, then chair of the Ukrainian Council of Investment Businesses, Anatoliy Holovko and Oleksandr Boyko.

However, when a proper law on the SEC was formulated in 1997, US and other specialists recommended that it be expanded and run as a septumvirate. Moreover, to protect individual commissioners from any perceived risk, should a particular decision be likely to step on someone’s toes, every decision was to be handled by a group vote. The quorum was set at five.

A few good motives

The murder of Romashko came as a blow to the national securities market. “This appalling incident calls on everybody committed to a market economy to declare before the world that Ukraine will see a civilized and effectively operating stock market,” read a joint statement signed by members of the PFTS, a stock trading system, the USE and KISE, and other independent organizations.

“His death was a real shock,” Mykola Shvetsov, head of the Mizhregionalniy fondoviy soyuz, an interregional securities union, told EE in March. “I still don’t understand how it happened and what the reasons were!”

But, as with any murder, speculation as to the reasons behind the killing started with the first media reports. Privatization Oversight Committee Chair Oleksandr Riabchenko, who announced the news Oct. 29, was the first official to address this. “It could be a conflict in the sphere of ownership rights.” Romashko had been involved in registering new owners of privatized objects. When rights are transferred from one party to another, there are often conflicts, such as the original company refusing to register the new owners. “The murder could also be linked to attempts to carry out ‘shadow privatization’ of a particular site,” said Riabchenko.

Iryna Zaria, president of the PFTS, disagreed. “I’m almost 99% sure that this is tied into Romashko’s professional work,” she said, “but it was most certainly also not based on any one particular case. The problem went much deeper than that.”

“I don’t know what Romashko was working on there recently,” noted Riabchenko, “but where business groups are involved, you can never satisfy everybody. That’s where the police should look first.”

2000, a Kyiv paper, linked the murder to the 1998 killing of Vadym Hetman, then-president of the UICE, although this comment had no official support. 2000 went on to call the investigation into Romashko’s death “unusually secretive.”

The PGO offered somewhat different motives. Deputy PG and Kyiv City Prosecutor Yuriy Haisynskiy suggested relations at work, private commercial activity, and “personal motives.” Yet another reason cited was the possible handing over of control over the National Depositary from the Commission to the Finance Ministry.

A few good stories

The rumors flew fast and furious. Most mass media, spurred by stories published on Pro-UA, a website connected to two of the commissioners with whom Romashko had some conflicts – Viktor Ivchenko and Mykola Peftiyev – wrote about “the huge scandal in the SEC,” alleging that Romashko and his boss Oleh Mozgoviy were involved in corruption.

A source in the Prosecutor’s Office offered one unconfirmed story accusing Romashko, who ostensibly had access to information on share auctions, of pressuring potential buyers through his people for kickbacks from successful sales. Theoretically, Romashko’s position could provide ample opportunity for abuse.

Several papers wrote that the SEC did not respond to “the illegal activity of several its members, who took money under the table from companies for registering emissions.” Some even accused Romashko’s staff of resorting to “plain old extortion” when auditing various organizations.

InvestGazeta reported that the president had criticised SEC activities and that the PGO had twice called on Mozgoviy to “eliminate violations in SEC work.” Incidentally, these accusations were largely based on letters to the Administration and others written by two commissioners, Peftiyev and Holovko, although their missives contained no specific details.

A few missing details

Indeed, no published articles, including source articles on Pro-UA, contained concrete details that clearly described abuse. A typical accusative statement read: “SEC Chair Oleh Mozgoviy has repeatedly demonstrated that he who signs the legislative acts and laws does not always follow them.”

A letter to Mozgoviy from Cherkasy council deputies regarding the inspection of a Cherkasy firm called Grafia Ukra?ny, read: “Your deputies Romashko and Biriuk are ignoring the obvious facts, impeding the investigation and presenting falsified information to the PGO.” There were no other details in the letter, no mentions of documents or dates when these events took place.

Romashko’s opponents accused him of “lobbying the interests of certain groups of shareholders at the regional level.”

So far, all examinations of both public and internal professional and media sources failled to turn up anything concrete that would point to wrongdoing on the part of Romashko. The next step is to look at the inner workings of the SEC itself.

Part 2

“A yapping puppy”

When it was first founded in 1995, Ukraine’s State Securities and Stock Markets Commission or SEC was “much like a yapping puppy. It had no power, no money, no reputation,” says a TA specialist who worked with Romashko at the time. Pay was low and “creative opportunities” were next to nothing because the market was nascent. During this early period, all efforts of international aid donors went into raising the Commission so that it could be an independent, effective body.

As soon as Oleh Mozgoviy brought his first four fellow-commissioners on board, the various areas of responsibility were parceled out. Anatoliy Holovko was given the depository and securities registrar. Mykola Volkov took on SRO and trading systems. Oleksandr Boyko handled corporate finance and share issue registration. The knowledgeable and precise Romashko’s legal background made him useful for enforcement, so he took on the Kontrolne reviziyne pravlinnia, control and audit. Mozgoviy himself managed the Commission.

In 1997, the SEC was somewhat restructured by a new law. Now there would be seven rather than five members, and all decisions would be made by group vote, to protect individual commissioners. But the best laid plans of mice and MOUs have a way of going awry. So did the SEC – when a combination of the wrong people, greed and frustrated ambitions served to paralyze the Commission entirely.

New places, new faces

At this point, three new commissioners came on board. Since the first five Commissioners were “presidential” appointees, the Verkhovna Rada got to pick two of its own. It chose Viktor Ivchenko, a one-time financial consultant to Oleksandr Moroz, and Mykola Peftiyev, a mid-level government official connected to Donetsk interests. Peftiyev replaced Boyko, who had left the SEC to work on at FMI, a USAID project consultancy, so the other new spot was filled by Serhiy Biriuk, a prot?g? of Oleh Taranov.

Ivchenko was presented as a great specialist although, in fact, he was not a securities guy at all, say market insiders. An aging Komsomol from Odesa , he had been involved in the MZhK cooperatives in the late 1980s and eventually moved on to BLASCO, where the first Mrs. Ivchenko was chief accountant. When problems began at the shipping company, the Ivchenkos took off for California before he could be caught up in the scandal. But that was the start of his financial troubles.

Ivchenko resurfaced in Kyiv with fellow Odesite Valentyn Symonenko, who was now head of the GAO. A very generous, personable man and an excellent speaker, Ivchenko found a spot among Moroz’s advisors, as the point man on financial and securities markets. By the time he joined the SEC, though, Ivchenko was over 50 and looking for something more permanent.

Peftiyev also had character and ambitions. SSSMC was very flat, low profile, inert, even amorphous, but knowing that his predecessor had handled thousands of company emissions and share registrations a year, Peftiyev may have hoped this area offered the kind of creative “flexibility.” Then the Commission was reorganized and all the real functions essentially handed over to the young men in the SEC apparatus. The commissioners became a kind of “think-tank” without official duties and suddenly Peftiyev had nothing to grab onto.

The national idea

In other words, pickings, as they say, were slim for the new boys. But when a new law on the National Depository System was being passed, Ivchenko, who had supervised the executive branch on his own at the GAO, became the executive officer. This offered an opportunity that he was determined to pursue.

It just so happened that the second Mrs. Ivchenko, Vira Ulianchenko sat in the offices of NBU Governor Viktor Yushchenko as one of his advisors back in 1997. Through her, Ivchenko was able to catch Yushchenko on the word “national,” as in “the national interest,” “the protection of domestic players,” and so on. Yushchenko liked the idea of a National Depositary, like a National Bank. Unfortunately, while everyone in the government understood “National,” few understood “Depository.”

Ivchenko had his own ideas and began promoting the idea of a state-owned and operated National Depositary under the SEC, that would not just regulate, but also manage the domestic securities market directly. And he doubtless saw himself as the head of this entity. By the time regional financial markets collapsed in late 1998, however, donor organizations realized something had to be done to avoid Ukraine’s securities market from becoming even more dysfunctional.

Preventive measures

The concept of a Clearing Depository is a key element to a mature stock market. Ukraine had no appropriate centralized entity that could serve all licensed securities markets such as stock exchanges, trading and information systems, and all market participants – issuers, registrars, custodians, brokers and licensed markets.

To that end, on Jan. 25, 1999, the Government of the US represented by USAID, the Government of Ukraine represented by Vice Premier Serhiy Tyhipko, the World Bank represented by Ukraine head Gregory Jedrzejczak, then-NBU Governor Yushchenko, and Mozgoviy, signed a memorandum of understanding valid through 2010, about assistance and financing to develop a proper centralized depository.

Key in the MOU was the statement: “Although the Parties do not object to the creation of the National Depositary by the GOU, it is agreed that any such entity shall have no commercial functions whatsoever and may incorporate only three functions: codification, standardization and international relations.” Moreover, the GOU promised to “reject government ownership positions, especially controlling or blocking positions, in commercially viable capital market institutions.”

Moreover, the government was to specifically protect “against imposing any Government- or VR-created structure such as a National Depositary with more than the three functions, upon private market participants.” Both the GOU and the SEC also agreed to “refrain from” merging private-sector depositories with an ND or other state-owned institution or changing their legal and operational status – unless those depositories had their shareholders’ consent for such a step.

Conflicts of interest

Nevertheless, the Cabinet went ahead and passed a law on the National Depository System that incorporated a fundamental conflict of interest. In early April 1999, when the Kuchma-Gore commission met to review capital markets developments, the Americans were ready to pull out. But the two governments came to an agreement that management of the NDU would be transferred from the SEC to another state body.

In a memo to Tyhipko on Apr. 27, the proposal for the best choice for management of the state share of the NDU was the National Bank of Ukraine. Yushchenko readily agreed.

At a meeting with Tyhipko May 13, these points were raised again in the context of conditionalities for a World Bank Edal II loan. The Bank was keen for an official decree to transfer depositary management to the NBU or the Ministry of Finance. US Ambassador Pifer noted that President Kuchma was being urged to sign a new decree to that effect, although Kuchma’s advisor, Yevhen Hryhorenko, thought the changes could be accomplished without a decree, saying it was “not a wise use of the President’s time and power to sign the documents proposed by the US government.”

In June, Kuchma signed the new decree.

Ivchenko could see his castle of sand crumble and things got ugly enough for a short time that a USAID employee even received death threats.

By September, however, the situation had not changed, thanks to the determined efforts of Ivchenko to prevent control of the NDU from leaving his hands. Once again, the Kuchma-Gore commission meeting focused on control of the depositary.

The concern was that management of the ND by the SEC and unrelated state bodies would cripple investor confidence. And unless the GOU went and adopted the necessary corporate charter and implemented the June decree, the Americans warned, it would make little sense for USAID to continue its depository project.

Part 3

A prince among men

Initially, Oleksiy Romashko was quite unremarkable. “If anything,” says an American specialist who worked on developing Ukraine’s SEC, “he was a bit obstructionist at the start.” But Romashko proved a very good learner. “He’s a classic example of what some decent training – and a little patience – can do to change a bureaucratic mentality into a professional one.”

Romashko also became a good intermediary with other commissioners. “He was able to persuade them to actually listen to advisors,” was the comment of several colleagues, including Mykola Shvetsov, president of Mizhregionalniy fondoviy soyuz, the interregional securities fund.

“Capital markets development effects the heart of a society and its economy, from employment to government budgets to pensions,” says John Yancura, a financial specialist who worked in Ukraine in the late 1990’s. “Romashko was one of the more competent and driven Ukrainian reformers in this area.” Indeed, many of his colleagues, including Shvetsov, regularly called on Romashko to resolve problems of a theoretical and technical nature.

In recent years, the general consensus was that the SEC was not bureaucratically effective. “Romashko,” says a Ukrainian securities specialist, “was the only one really aware of the need for internal discipline.” Nevertheless, he was opposed to Commissioners Viktor Ivchenko and Anatoliy Holovko on many issues, including the National Depositary. “It seems a little more than coincidence,” says Yancura, “that Ivchenko, Holovko and Peftiyev were the ones who pointed fingers most vehemently concerning corruption on Romashko’s part.”

Divide and paralyse

The Commission itself was initially soft on the idea of the Depository as a “national” interest involving “national” security. At the same time, it tried not to be too obviously “pro American,” since most of the technical assistance and advice was from US specialists. Moreover, with five out of seven votes required to make any decisions, it was important to maintain a balance of relations among the SEC members.

Nevertheless, Ivchenko was determined to run with his own idea of the National Depositary and his ties to presidential favorites Pavlo Haidutskiy, a one-time Agricultural Minister and now deputy Chief-of-Staff, and Chief-of-Staff Volodymyr Lytvyn, made him less than friendly with SEC head Oleh Mozgoviy.

At one point, Mykola Volkov, who handled SRO and trading systems, was the key voice, shifting back and forth as it suited him. But other commissioners gradually drifted, too. Mykola Peftiyev turned against Mozgoviy and became confrontational.

Some insiders claim that Ivchenko spent a lot of money to get people on his side, including commissioners such as Anatoliy Holovko. “With three kids to feed,” says one TA specialist, “his salary wasn’t that much. But suddenly Holovko had a new apartment, a mobile phone, and so on.”

Ironically, all public accusations were against Mozgoviy and Romashko. “The ‘Romashko is bad’ stories seem to stem from the real corrupt commissioners, Ivchenko, Holovko and Peftiyev,” Yancura told EE Nov. 25. “Those guys have been playing smash and grab with the stock market as long as they have been in the SEC.”

Certainly, all the media dirt tended to originate – often anonymously or pseudonymously – on the Pro-UA site, in which Peftiyev has an interest.

Pouring poison in his ear

“Internal corruption and obsession with market manipulation by rogue commissioners stunted the development of the SEC,” Yancura told EE Nov. 3. An industry insider was even more blunt in December: “Romashko was murdered by the situation in the SEC in the last 18 months.”

These harsh judgements have some basis in reality. Already in September 1999, concern was growing among stock market specialists that management of the National Depositary by the SEC and unrelated state bodies would cripple investor confidence in Ukraine at a time when the country was already reeling from the 1998 regional financial crisis. USAID went so far as to suggest that it might not continue its depository project.

The main force blocking the necessary changes was Commissioner Ivchenko. When Viktor Yushchenko became premier in December 1999, Ivchenko’s second wife Vira Ulianchenko, who had been Yushchenko’s advisor at the NBU, went with him – as did Ivchenko’s concept for a National Depositary to run the market. Market players, the Commission and the Administration were all against it, but Ulianchenko brought papers involving the NDU to Yushchenko and he signed them – possibly without reading them, because he trusted her.

Some of the SEC’s advisors began to warn Yushchenko’s people about Ulianchenko’s influence at the beginning of 2000, but little changed. Ulianchenko was entrenched enough that she would eventually run on the Nasha Ukra?na party list in the 2002 VR election.

There’s the rub

In late 1999, Ivchenko set up a department within the National Depositary to organize and monitor ownership rights and maintain a consolidated copy of such records. This conflicted with the MOU signed between Ukraine and donor agencies Jan. 25, 1999 [see Part 1].

On Mar. 26, 2000, the Mizhregionalniy fondoviy soyuz or interregional securities fund opened as the “clearing depository serving the entire market, owned and managed by market participants.” An independent body, MFS members represent much of Ukraine’s securities industry.

But on May 19, 2000, the Cabinet passed Order #8698/46, essentially turning the Depository into a competitor to the MFS and giving it regulatory functions legally reserved for state bodies. Two weeks later, a general shareholders’ meeting of MFS had voted to call on President Kuchma and the Cabinet to liquidate the NDU.

On June 12, a letter from USAID to then-first vice-premier Yuriy Yekhanurov noted that what the NDU was doing was in complete contradiction to the necessary division of functions originally agreed to by the Government of Ukraine. “The transfer to the NDU of the ‘management and regulation’ of all ‘participants’ of the depository system (e.g., registrars, custodians and depositories)… would undermine the regulatory role of the National Bank and the Securities Commission and place a large segment of the industry under the control of the NDU,” wrote a concerned Christopher Crowley, the USAID mission director. The changes were also in contradiction wth an EDAL-II tranche of loan from the World Bank.

Instead, on June 21, the NDU shareholders – 86% state – voted to authorize the NDU as a fully operational clearing depository. This was what Ivchenko had been waiting for.

Drifting downstream

Meanwhile, at the Commission, the principle of collective voting had ceased to operate and it was effectively paralysed. Work went on and problems grew by leaps and bounds: privatizations, new share issues, share disputes. But each Commissioner was now forced to take decisions solo. Being in enforcement, Romashko was the most exposed.

Among entrepreneurs in clan-controlled Donetsk, Romashko was considered “impossible” to “come to terms with.” L’viv entrepreneurs also were saying that Romashko was “too clean” and “needed to be removed.”

As a commissioner, however, Romashko had no direct regulatory role with depositories. “There was nothing going on at the SEC that was worth killing for,” says Shvetsov. “The commissioners didn’t make decisions of that nature. Moreover, these people knew very well that any SEC decisions could ultimately be gotten around one way or another, if necessary – including through the courts.”

Gradually, all issues around the National Depositary were blocked. The Cabinet tried to move control of NDU shares to MinFin but it did not have the authority. Ivchenko then threatened to sue because he was the official representative. It was a no-win situation.

In September 2001, Peftiyev suddenly tendered his resignation.

A few weeks later, Romashko was dead.

Postmortem

“When a charismatic journalist disappears [ref. to Georgiy Gongadze], the international community rushes to make speeches,” says John Yancura. “The murder of one of the more competent and driven Ukrainian reformers should not be buried, either.”

In a sad P.S., although Oleksiy Romashko was the equivalent of a deputy minister, the highest persons present at his funeral were Yevhen Hryhorenko from the Administration apparatus and a man from the Treasury – both of whom had simply worked with Romashko. But official Kyiv did not send a single representative at Romashko’s own level.

For the Mizhregionalniy fondoviy soyuz, the worst effect of a moribund SEC has been lack of development. “Our client base keeps growing,” says Shvetsov, “but we can’t change our statutes, which means no new approaches, no new products or services. We’re effectively locked into status quo.”

As to the infamous National Depositary, since 1999, Hr 50mn has been sunk into it. The results? 50 people working at 50 computers – and no business at all. Of course, Viktor Ivchenko drives a Mercedes. •

[SIDEBAR]A curious calendarEvents of note in the aftermath of Oleksiy Romashko’s death have been few and far between. From the start, the investigation has been seen as unusually secretive, half-hearted and “symbolic.” Neither the SEC nor the Prosecutor’s Office were able to offer any comments to EE.

Nov. 2 A local paper, 2000, links the murder of Romashko to the similar April 1998 assassination of UICE President and one-time NBU Governor Vadym Hetman.Nov. 6 Eight days after Romashko’s murder, SEC Chair Oleh Mozgoviy says he has asked the government to appoint new members to the seven-person board. As of April 2002, no new members have been appointed.Dec. 15 Obkom.net gives a review of Romashko personally and professionally and story about his family. There was nothing against Romashko, only that his half-brother was involved in some criminal activity.Jan. 4 Petro Opanasenko, boss of the Interior Ministry’s Main Police Department, says investigators have identified a group of people who may have been “interested” in murdering Romashko. Opanasenko says much work and analysis will be needed to uncover those involved.Jan. 8 Deputy Prosecutor General Mykola Bahanets says that, by the end of January, he expects the PGO to launch a criminal case in court in the Hetman murder. Bahanets says that eight people charged in the case are becoming acquainted with the investigation’s materials.Feb. 27 Tax police raid the offices of Obkom.net in the Koral Bank building and confiscated five hard drives used by Obkom company but owned by Koral Bank. Tax officials claim Obkom is directly connected to Koral Bank, where over Hr 25mn has been transferred through the single account of a fictitious firm. The site never re-opens.Mar. 19 A suspect in the Romashko case is released. PG Deputy and Kyiv prosecutor Yuriy Haisynskiy says “There were no grounds to charge him, so he was freed.” Haisynskiy expresses confidence the case will be solved. •

Originally published in Eastern Economist #426, #427 and #429 in late March and April 2002.